Sales Comparison Valuation of Development and Operating Stage Mineral Properties Trevor R. Ellis, CPG, CMA, CGA, FAusIMM 2001-2008 Chairman, Extractive Industries Task Force International Valuation Standards Committee Mineral Property Appraiser Ellis International Services, Inc. Denver, Colorado, USA www.minevaluation.com SME-AIMA Annual Meetings, Denver, 28 Feb - 2 Mar 2011 1
SME Preprint Manuscript # 11-151 Peer Reviewed and accepted for publication as a Technical Paper in Mining Engineering 2
Focus of this Paper Estimation of Market Value as the basis of the Appraisal of mining properties For feasibility study properties through operating properties Using the Sales Comparison Approach 3
Context Mining industry valuations are commonly based on Net Present Value (NPV) of Cash Flows NPV/DCF method of the Income Approach. Most mining industry appraisals only provide an economic evaluation NPV, or an estimate of Investment Value based on a specific entity s (company s) investment parameters. Not an estimate of Market Value based on inputs derived from markets for mining industry assets. 4
Examples of Misleading Income Approach Valuations Appraisal report by a certified appraiser estimates the Market Value of Utah copper reserves at US$1.8 Billion in 2005 when copper is $1.70/lb ($3.70/kg). Report used to raise funds for mining equipment and mill. After a year of mining and milling the copper reserves at higher copper prices the mining company goes bankrupt. In 2007, an appraisal report by a certified appraiser estimates the Market Value of a 20 ac (8 ha) Wyoming gold exploration property at US$128 Billion when gold was $660/oz. Report used to raise investment funds. No evidence yet that a mine will ever be developed. 5
Misleading Valuations Arizona property containing early 1900s onyx-marble mine has Market Value of US1.4 Billion in 1983. In 1987, sells for US$15 Million. Valued in 1989 for $1.2-1.8 Billion by a highly experienced geologist. Market value appraisal reports over the next 20 years by the geologist confirm the value at ~$3 Billion. The property s16 mining claims are marketed to investors at $150 Million each. No mine redevelopment yet. Three separate valuation reports in 2002-2003 by geological engineering consulting companies for 322 000 acres (130 000 ha) of coal and hydrocarbon rights in Montana gave the value as US$5 Billion, $8 Billion, and $361 Billion. The mineral rights holder failed to raise $50 Million by 2008 to drill the resources. 6
Misleading Valuations An operating quarry in Connecticut is valued by a certified appraiser at $2.4 Million for a 2004 State Government taking for a highway After the State had paid $3.2 Million for the 150 thousand ton crushed stone inventory: $21/ton The court awards $27 Million plus interest In all five cases, only the income approach was used. Generally serious flaws can be identified if detailed review can be performed. 7
Sales Comparison Approach Rarely Employed Most minerals appraisers have no training in sales comparison adjustments. Real estate appraisers who attempt mineral property appraisals use small adjustments (10% - 30%) appropriate for houses. Large value adjustments, sometimes >100%, are necessary for mineral property comparisons, such as tonnage, grade, and risk. Total adjustments may be greater than 10-fold. 8
Transaction Comparisons Across Borders Often said that it is not possible to compare transactions across regional or national borders. Company managers track how much their competitor paid for that copper property or mine in Chile, Peru, Canada, Australia, or the Democratic Republic of Congo. Many companies invest around the world. 9
Transaction Analysis Transaction Analysis is used for generating market derived inputs for all three Appraisal Approaches. For example, the information generated here can be used to build cash flow models for extracting market Internal Rates of Return (discount rates). Author recommendation: Convert the transactions to a common unit basis for use in the Sales Comparison Approach. 10
Possible Components of the Transaction Analysis Acquisition Date Buyer - Major or Minor player Acquisition Type - Company or Property Life of Mine, Production Years Mine Type - Surface, underground, mixed Products, Important By-product Interest Purchased - Ownership or rights; percentage Production Loss/Product Recovery % Price paid for comparison component - real property, mineral rights Geology Development Status Reserve Category Quantities Proven and Probable Resource Category Quantities Measured, Indicated, Inferred Adjust to a common certainty or value basis - reserve equivalent tonne/kg/oz Price paid per unit (e.g. reserve equivalent kg) Exploration/Development/Expansion Potential Annual Production Rate Seller Investment Planned Buyer Product Price or Price Forecast Royalty Rate Operating Cost per unit of production Sales, General and Administrative, % of sales Net Income before income taxes, per unit or % sales Comments - Additional information Annual Production Rate Buyer 11
Possible Components of the Sales Comparison Approach Adjust Transaction Unit Values to the Subject of the appraisal Adjustment Bases Agreement/Sales date Effective Date of Valuation Price Paid per unit (e.g. $/reserve equivalent tonne) Long Term Product Price Expected First adjust unit price paid to Effective Date of Valuation Adjust long term product price to Effective Date of Valuation 12
Possible Components of the Sales Comparison Approach Adjustment factors may contain overlapping components. Be careful to avoid double counting of the influence of components Minority Interest Project Development Status Deposit Grade Deposit/Project Size Property Control and Security of Tenure Capital Investment Requirement Operating Cost/Net Operating Income Production Loss/Recovery /Metallurgical Complexity Adjustment Factors Product Market Stability Discovery and Expansion Potential Location and Access Infrastructure Permitting Issues Reclamation Country Risk Project Risk Product Quality Taxes, Royalties, Levies 13
Brookfield Quarry, Connecticut Transaction Analysis and Sales Comparison Analysis Photo 1: Brookfield Quarry, Connecticut: Subject Photo 2: New Milford Quarry, Connecticut: Transaction 1 14
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Two simplistic Sales Comparison trials using Net Operating Income (NOI) adjustments are followed by the full Sales Comparison Adjustment Table Note the large (NOI) adjustment multiples derived for Transaction 4, justifying its low acquisition price 18
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Transaction Analysis and Sales Comparison Adjustments for the Las Brisas Gold Mining Concessions, Venezuela, February 2006 Nine transactions from around the world are shown here, analyzed and adjusted to the Las Brisas property. In the Sales Adjustment table, Operating Margins are used to adjust the transactions to the effective date of valuation, due to a rapidly increasing gold price market. Other economic factors are then used in the subsequent adjustments. 22
Table 8- Side-by-side Comparison of the 9 Transactions
Sales Adjustment Factors Time and Price adjustment: Adjusts for change in gold price, to that at the effective date of valuation. This percentage adjustment factor is the ratio of the operating margins at the two dates. Developed v. Undeveloped Reserve adjustment Reserves v. Resources balance adjustment Deposit/project size adjustment Open Pit v. Underground Mining adjustment Operating Cost (including energy price factors) adjustment Country Risk adjustment Other Risk adjustment
Table 9- Sales Comparison Adjustment Grid
Reconciliation and Final Estimate of Market Value for Brookfield Quarry Value derived from mining: Sales Comparison Approach: $55 million Income Approach: $30 million Reconciled value from mining: $45 million Add value derived from concurrent backfilling with clean fill and reclaimed land sale: Income Approach: $25 million Total Market Value: $70 million 27